This is a good question! Let’s look at the noun ‘loophole’ first, then we can apply it to the sentence above. A loophole refers to a flaw or inadequacy in a set of rules or even in the law. This loophole or ambiguity gives people the opportunity to do something that they shouldn’t be allowed to do without actually breaking any rules or laws.
For example, imagine a coffee shop that offers free coffee refills to customers who bring their own reusable coffee cups. But the owner doesn’t state that customer’s who leave the coffee shop and come back to the coffee shop later on in the day, can’t get more refills. One customer notices this loophole and comes in and out of the coffee shop during the day expecting free refills each time.
Therefore, a loophole in a system is referring to an omission, flaw, inadequacy or ambiguity in the system. This loophole enables a person to avoid following certain rules, guidelines or laws. For example, if an accountant finds his/her client a tax loophole, the client can pay less tax or avoid paying taxes without breaking the law as the client can avoid the scope of the tax law.
There can also be loopholes in policies, the law, an agreement, legislation, trade, relations and so on.